The average
FICO score in the U.S. is 714, according to the latest data from Experian. But many people have a score that falls far below this number. Experian defines the credit scores from 300 - 579 as “Poor” and 580-669 as “Fair.” If your score falls into one of these categories, have you ever wondered how to open a bank account with bad credit?
Let me go ahead and put your mind at ease - you can open a bank account with bad credit. A “poor” or “fair” credit score does not eliminate your ability to open a checking or savings account. However, this doesn’t mean there may not be a few challenges along the way.
Why having a bank account matters
If you do not currently have a checking or savings account, it’s likely for one of two reasons. The first could be because you choose not to deposit your money with a financial institution.
Approximately 5% of the U.S. population is currently “unbanked” by choice, according to the Federal Deposit Insurance Corporation (FDIC). The No. 1 reason cited is a distrust in the government and financial institutions, leaving some people to avoid banks altogether and possibly pay cash for everything.
The other reason someone may not have a bank account is that they’ve tried opening one but were denied because of bad credit history or too much negative banking activity. This can be a frustrating experience for anyone in this position since so much of our financial activity relies on the need for a checking account.
A bank account, such as checking or savings, is necessary for numerous reasons. It allows you to deposit your money, withdraw funds as necessary, pay bills and people. It even allows your employer to pay you directly. And with the advanced security available through banks and credit unions and FDIC-insured accounts on amounts up to $250,000, there has never been a better time to put your money in one of these options.
Having a bank account is an important step in managing your finances. Getting one is like the launchpad to achieving other financial goals, such as improving your credit score with on-time bill payments or building an emergency savings fund. If you’re having trouble getting approved for a bank account because of bad credit, it's worth the effort it takes to get one as soon as possible.
Why was I turned down for a bank account?
When you walk into a bank and apply to open a checking or certain type of savings account, the bank will run a credit check. Most banks use the ChexSystem, but there are others available. A ChexSystem report looks for cases of fraud, history of bounced checks, checking and savings account histories, too many overdraft fees, or other red flags. Often your credit score will be evaluated too. If any of these reviews come back with negative marks, you could be denied the opportunity to open a bank account.
How to open a bank account with bad credit
So what happens if you go to a bank to open an account and you’re turned away? Here are six options you have.
1. Apply for a second-chance account
A
second-chance checking account is when a bank or credit union does not use your ChexSystems or credit score to make an account decision. It’s actually a smart alternative for a checking account if you’ve been denied because of the ChexSystems report. It has the same benefits as a checking account, the only difference is the application process.
These accounts are designed for rebuilding your report and for allowing you to add more positive entries to your checking and savings history. They often have low minimum balance requirements, and you may even be able to find one with low monthly fees.
While many traditional big banks offer these types of accounts, such as Wells Fargo, you might try a credit union or regional bank. Comparing options is important because many of these second-chance accounts come with higher monthly fees.
2. Ask the bank to reconsider the decision
Perhaps the second-chance account doesn’t have the features you’re looking for and you still need a checking or savings option offered by the financial institution. Another recourse is to ask the bank (or credit union) to reconsider the decision.
So often, we’re conditioned to accept an answer regarding credit cards, loan decisions, or other credit applications. Banks and credit unions can reverse the decisions in some cases.
Ask a bank associate or manager to reconsider your application. Explain you’re working to rebuild your credit and checking history. You could discuss any negative marks, too, explaining if there was a particular financial hardship impacting scores, such as a job loss.
The old expression “it never hurts to ask” is completely appropriate in this case. Don’t be afraid to ask for reconsideration. If possible, try to find out what impacts your scores the most on your report so you can proactively address it.
3. Open an investment account
You may not realize you have another option available by opening an investment account. Many of these popular investment account options offer checking to go with it, and tons of options are available. Companies like Fidelity, Merril, and Schwab are a few examples. These companies typically do not run a credit check to establish an investment bank account.
These accounts are mostly made for making trades and buying investments, but they come with checking benefits, too, including a debit card. So what’s the catch? Many of these accounts require a larger opening deposit. You’ll need to watch out for monthly fees too.
You can find these accounts with online banks, traditional banks, brokerage houses, and credit unions. It’s worth the time to shop around and compare opening deposit amounts, bank fees, and free ATM usage.
4. Use a prepaid debit card
A prepaid debit card gives you many of the same functions as a debit card. It allows you to withdraw funds, make online purchases and payments, and have ATM access. You can move money between accounts too.
There are some drawbacks to using a prepaid debit card, though. You do not have direct deposit capabilities, which could be an issue or inconvenience for getting paid from your job. Secondly, there are often high transaction fees associated with them.
5. Apply for a secured credit card
If you need a checking account mostly for making purchases, then applying for a secured credit card is another option. These credit cards are great for those who are establishing credit or rebuilding - as long as you choose a secured credit card that reports your activity to the three credit bureaus. They can be used virtually the same way as any other credit or debit card, as long as the business accepts credit card payments.
A secured credit card option gives you a credit line for purchases requiring an initial deposit. Your line of credit is equal to the amount you put down. As you make regular on-time payments, your credit line increases.
This is a smart option for making a positive impact on your credit history, but you won’t be able to use it for accepting direct deposits or setting aside
6. Check your reports for free
Working on rebuilding your credit is essential, even if you can find a workaround with one of the abovementioned solutions. Whether or not your quest to open a new account comes to fruition right away, there are steps you can take to improve your history and reports.
One tool you have at your disposal is regularly checking your credit reports for free. Every consumer is guaranteed one free credit report from each of the three major credit bureaus (Equifax, Experian, TransUnion). You do not have to pay or commit to a credit monitoring service either when you visit AnnualCreditReport.com.
Typically the negative marks stay on a ChexSystems report for up to five years, and credit reports carry negative information for up to seven years. Fortunately, you may not have to wait that long to open a new account, though.
The bottom line
It is possible to open a bank account with bad credit, and you may face challenges, but several options are available. You could try finding a bank or credit union offering second-chance checking accounts or ask the financial institution to reconsider its denial decision. You could try using a prepaid credit card or secured credit card for purchases and moving money between accounts, but you won’t have access to direct deposit capabilities. You may find an investment account that serves your needs too. Don't give up if you’ve been denied a bank account because of bad credit! It won’t take you long to get back on your feet.
